Originally published in the March 27 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s executive branch is proposing new antiavoidance rules in response to the veto of a provision in Law 11,457/2007 that would have required a decision from a labor court for revenue agents to be able to recharacterize a service agreement as employment for social security tax purposes.
Brazil’s executive branch on March 21 sent a law project to Congress proposing new antiavoidance tax rules in response to the veto of a provision in Law 11,457/2007 that would have required a decision from a labor court for revenue agents to be able to recharacterize a service agreement as employment and assess the corresponding social security taxes on payroll.
Although it was originally announced that the law project would regulate the recharacterization of personal service companies’ income by tax authorities, Law Project 536/2007 is broader and is not limited to that subject. In general, it provides guidelines and procedures for tax authorities to use in disregarding any type of transaction carried out by a taxpayer. The difference between the law project and revenue agents’ current practices is that taxpayers — if the project is converted into law — will have an opportunity to present arguments and document the legitimacy of their transactions before a tax assessment is issued.
Article 1 of the law project provides for a general antiavoidance rule whereby any legal act or business adopted by taxpayers with the purpose of disguising a taxable event or the nature of a given taxable transaction will be disregarded for tax purposes according to the procedures established therein. The same antiavoidance rule applies to acts and transactions that seek to conceal a taxable event with the purpose of reducing, avoiding, or postponing a tax payment.
Articles 2 and 3 establish the antiavoidance procedure as follows:
- On detecting a transaction that is subject to being disregarded, the revenue agent will notify the taxpayer, describing the facts and grounds that support its position. That notice is not a tax assessment; no tax or penalty is assessed at that moment.
- Within 30 days, the taxpayer may respond to the notice by presenting evidence to support its original position.
- After receiving the taxpayer’s response, the tax agent may or may not review its position. If not, the tax agent must send the case, along with the taxpayer’s response and evidence, to its superior authority for a decision.
- The superior authority has 120 days to issue a decision as to whether the disregarded transaction is valid. The law project does not address any potential consequences if a decision is not delivered within that period.
- If the decision supports the taxpayer’s arguments, no assessment will be issued and the transactions will be accepted as is. However, if the decision upholds the revenue agent’s arguments and evidence, the taxpayer will have 30 days to pay the applicable taxes, with interest and a delay penalty (of up to 20 percent). If the taxpayer accepts the decision and pays the applicable taxes, no formal tax assessment will be issued.
- If the taxpayer does not accept the decision, the revenue agent will issue a tax assessment for the applicable taxes, interest, and an assessed penalty of 75 percent (instead of the 20 percent delay penalty).
- After the assessment is issued, the taxpayer will have an additional 30 days to file a protest against the assessment. From that point on, the case will follow the ordinary procedural rules for administrative tax litigation.
Article 6 provides that the Federal Revenue Department may issue further regulations.
Although the origin of Law Project 536/2007 seems to be the presidential veto of the provision in Law 11,457/2007, the law project affects more than simple employment contracts disguised as service agreements. It enables tax authorities to question and challenge any type of transaction – tax planning included —that in their view is an attempt to escape, minimize, or postpone taxation.
With the Revenue Service merger approved by Law 11,457/2007, revenue agents’ powers will increase if Law Project 536 is approved. Not only will revenue agents be able to challenge and disregard any suspicious transactions but they also will be able to assess any unpaid taxes, including social security charges, arising from the new antiabuse procedure. Therefore, the law project may be a dangerous tool if ever misused by tax agents.
David Roberto R. Soares da Silva